Tax laws vary among governments and countries. Jurisdictions often impose different income-based levies on enterprises than on individuals. Such systems of taxation vary widely, and there are no broad general rules. These variations create the potential for double taxation (where the same income is taxed by different countries) and no taxation (where income is not taxed by any country). Income tax systems may impose a tax on local income only or on worldwide income.
Due to these variations, it is important for companies working in a foreign country to understand the country’s tax and penalty assessments or work with an international tax lawyer. In the following case, International Development Solutions claimed it incurred tax and penalty assessments while working in Afghanistan and therefore submitted claims to the State Department seeking a tax reimbursement.
International Development Solutions, LLC CBCA Protest CBCA 6400, 6401, 6700
Decision issued March 16, 2022
In September 2010, the State Department awarded a security contract to International Development Solutions, LLC (IDS) for “worldwide protective services.” In August 2011 and March 2012, under task orders 9 and 11 (SAQMMA12F1044 and SAQMMA11F2609), IDS provided security services in Afghanistan valued at more than $400 million.
On May 29, 2012, the State Department was notified that Academi Training Center, Inc. had purchased IDS, becoming IDS’ sole owner. Prior to the sale, Academi Training Center, Inc. had owned 49 percent of IDS. Due to the sale and sole ownership status, Academi Training Center, Inc. requested a novation, a new contract, of the 2010 security contract and all associated task orders. On July 13, 2012, the State Department denied the request because (1) IDS was not dissolved because of the purchase and (2) IDS possessed the necessary support and resources from Academi Training Center, Inc. to fulfill its contractual obligations under the 2010 contract. For nearly ten years after the novation denial, IDS continued accepting payments, billed the State Department, and filed and prosecuted appeals before the Civilian Board of Contract Appeals (CBCA).
In 2017, the Afghan government issued tax assessments and penalties to ACADEMI LLC. The official tax assessments listed ACADEMI LLC as the taxpayer. In January, April, May, and July 2017, and July and September 2018, ACADEMI LLC and Constellis Holdings LLC each wired three tax payments to the Afghan Ministry of Finance.
In September and December 2018, and again in September 2019, IDS submitted claims to the State Department seeking a tax reimbursement of $36,714,278.18 for what it claimed was increased performance costs due to the 2017 Afghan tax assessments. In its claims, IDS described the 2017 and 2018 payments made by ACADEMI LLC and Constellis Holdings LLC as payments that IDS made. The State Department denied the claims, IDS appealed, and the CBCA consolidated the appeals to determine whether the tax payments made by ACADEMI LLC and Constellis Holdings LLC were actually costs incurred by IDS.
For a contractor to incur a cost, that contractor must suffer a liability or expense. SUFI Network Services, Inc. v. United States, 785 F. 3d 585, 593 (Fed. Cir. 2015). Economic sacrifice by entities other than the entity contracting with the government may contribute to contract performance or may be allocable to the contract, but unless the contractor incurs an economic sacrifice, that cost will not be recognized.
IDS offered two reasons why the CBCA should consider the tax and penalty amounts assessed against ACADEMI LLC and then paid by ACADEMI LLC and Constellis Holdings LLC to be costs of IDS. IDS first argued a transfer of 100 percent of business assets, including government contracts, resulting in the transfer of those contracts by operation of law without violating the Anti-Assignment Act, 41 U.S.C. §6305 et seq. A transfer by operation of law includes corporate mergers, consolidations, and reorganizations where the contract continues with the same entity but in a different form. Westinghouse Electric Co. v. United States, 56 Fed. Cl. 564, 569 (2003), aff’d, 97 F. App’x 931 (Fed. Cir. 2004).
IDS alternatively argued Academi Training Center, Inc. was IDS’ subcontractor. Relying on prior CBCA and court decisions, IDS argued it was accepted practice to recognize the existence of a subcontract following the failure of a novation.
The CBCA rejected IDS’ first argument as irrelevant. The CBCA stated that IDS failed to demonstrate the 2010 security contract passed “by operation of law” to ACADEMI LLC. Academi Training Center, Inc. had an ownership interest in IDS at the time of contracting. IDS neither alleged nor showed the contract passed at any point “by operation of law” up another level to ACADEMI LLC.
Also, the CBCA noted that in the performance of the contract, IDS continued to operate as IDS after the novation denial, and the 2010 security contract proceeded with the same entity (IDS), using the same corporate form. Thus, IDS’ first argument failed.
Additionally, the CBCA rejected IDS’ second argument as irrelevant and legally unsound, stating that even if the parent company was IDS’ subcontractor, IDS failed to demonstrate any legal obligation on IDS’ part to pay or indemnify Academi Training Center, Inc. for taxes or penalties owed solely by the parent company ACADEMI LLC.
The CBCA found no reimbursable cost incurred by IDS. IDS failed to adequately demonstrate it had actually incurred costs related to the Afghan tax assessments. ACADEMI LLC was the taxpayer listed on the official Afghan government documents, and ACADEMI LLC and Constellis Holdings LLC made the tax payments, not IDS. The CBCA denied the consolidated appeals.
IDS was part of a larger corporate structure. It is accepted that ACADEMI LLC was the parent company, underneath which was Academi Training Center, Inc., and underneath that was IDS. The other entity, Constellis Holdings LLC, was affiliated with ACADEMI LLC in some fashion, but it is unclear where in the corporate hierarchy Constellis Holdings LLC laid. Regardless of the hierarchy of the companies involved, the CBCA could not ascertain why ACADEMI LLC and Constellis Holdings LLC settled assessments by the Afghan Government of taxes and penalties, nor could the taxes and penalties assessed be tied directly and solely to the IDS contract.
Additionally, IDS did not provide the CBCA with any information regarding the tax laws of Afghanistan or any information on the corporate tax or penalty rates for the Afghan tax years in question. The CBCA did not know why the Afghan officials issued assessments of taxes and penalties to ACADEMI LLC, to begin with. Furthermore, it was unknown if corporate taxes in Afghanistan are (or were) always imposed only on the top company in a conglomerate structure or if the Afghan Government could have had a legal basis to initiate collection from the holding company’s subsidiaries or sub-subsidiaries, such as IDS.
In this case, the overwhelming unknowns and lack of evidence caused the CBCA to deny the appeal. If IDS presented more information regarding the Afghan tax laws and could prove the assessment of taxes and penalties were directly related to the contract, the outcome may have been different.
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